Regulating Insurance in Texas

A YEAR ago, the nation's leading critic of insurance companies accepted the challenge of regulating the frothy insurance market in Texas. Today, just about everybody praises Insurance Commissioner J. Robert Hunter for enhancing competition, squashing scams, reducing red tape, reinvigorating the state regulatory agency, giving all sides a fair hearing, and saving tax dollars.

``Bob Hunter is a breath of fresh air,'' says Ron Cobb, vice president of the southwest region of the American Insurance Association in Austin, which represents shareholder-owned companies.

Given that Mr. Hunter, the consumer advocate, ``worked hard at establishing himself as an outspoken critic of insurance companies and their business practices,'' Hunter, the regulator, has been a pleasant surprise, says Rick Gentry, regional vice president of the Insurance Information Institute in Austin.

``I'm satisfied that I've made the right moves so far,'' Hunter says. But the commissioner's next steps will be more difficult, Mr. Gentry warns. Those include deciding rate cases that affect every driver in the state. Auto insurers have requested a 73 percent rate increase for the 1 Texan in 10 who is a high-risk driver.

``How he deals with these cases will be the ultimate test,'' Gentry says.

Happy hunting ground

Texas has long been a happy hunting ground for insurers. The Lone Star State would be No. 1 with the most insurance companies - 2,600 - were it not for the mailbox operations that proliferate in Arizona. (Arizona allows companies to sell insurance in that state without maintaining an office there.) Texans do lead the nation in coverage purchased, forking over premiums that top $35 billion a year. Some 155,800 agents - more than 1 in 100 working adults in Texas - populate shopping strips around the state.

The Texas Department of Insurance, long derided as a bureaucratic couch potato, is supposed to keep an eye on things. ``It was at the bottom of the barrel - total disarray,'' says Kip Averitt (R), a state legislator.

Under a decades-old arrangement that was unique in the United States, the TDI commissioner was supposed to implement policy set by a three-person board appointed by the governor. Lack of accountability was inherent.

From state auditors to grand juries to the Legislature came complaints over the years that the TDI was too lax and cozy with the insurance industry; the department never levied a fine exceeding five figures.

Back-to-back insurance-company failures in 1988 - the largest in Texas history - prompted a rampage of resignations and demotions at the TDI. When Democrat Ann Richards was elected governor in 1990, a pro-consumer insurance-industry board was appointed. Board members sought to weed out industry influence within the TDI, but they paralyzed the agency and alienated the Legislature and insurers. Fed up with the turmoil, in 1993 the Legislature dissolved the three-man board and vested all regulatory power in the then-vacant position of insurance commissioner.

About 150 people applied for the job, but Ms. Richards wanted Hunter. An actuary who had worked for insurers and federal insurance regulators, he founded the National Insurance Consumers Organization in Washington in 1980 to attack what he called cartel-like practices.

Pursuing big infractions

Earning $150,000 a year, Hunter is the highest-paid insurance regulator in the US. His appointment last fall left state insurers aghast. Insurance lobbyist Tom Bond called Hunter the ``No. 1 tormentor of the insurance industry.'' But today, he says: ``I much prefer having [Hunter] to what we had before,'' even though he finds the commissioner ``very tough on companies he perceives to be not toeing the line.''

TDI lawyers were spending $700 to collect $500 in fines for relatively trivial violations when he took over, Hunter says. He sent them in search of bigger infractions and, within months, he had levied two six-figure fines.

In July, Metropolitan Life Insurance Company of New York was fined $1.2 million. Hunter says it was because the firm knowingly rewarded agents who sold people whole life insurance by misleading them into believing that it was a retirement plan. More than 75,000 Texans can apply for restitution.

Hunter caught Texans' attention when he questioned the practice of dismissing a ticket and granting a 10 percent discount on auto-insurance premiums when speeders take a defensive-driving course. According to claims data, those drivers should pay 7 percent more.

With 850,000 clients a year, defensive-driving schools are a large and organized industry in Texas. Thousands of Texans wrote postcards to Hunter asking him to maintain the status quo. Instead, he says he will ask the Legislature to let those who take defensive driving choose whether they want a dismissal or a discount, but not both.

Insurers, agents, and the TDI announced this month an anti-redlining initiative on writing homeowners insurance. ``It's a very positive, constructive approach to a very complex problem,'' says Ernest Stromberger, executive director of the Texas Association of Insurance Agents in Austin. ``It offers a model for other parts of the country.''

Insurers are willing participants, he says, ``but it's not anything they would have initiated.'' Hunter's ``role as a catalyst was pivotal,'' Mr. Stromberger adds. ``He deserves a lot of credit and praise.''

Next come the decisions on auto-insurance rates. Hunter acknowledges the large losses on high-risk drivers that erase companies' profits on other drivers. He has indicated that Texas could see ``maybe some fairly serious'' rate increases.

Meanwhile, back at the TDI, Hunter has directed the staff to develop the agency's first-ever business plan.

Already, the commissioner has eliminated 104 positions, leaving a staff of 943, saving upward of $2 million a year in a $45 million budget. And, he says, he is looking for more reductions. ``I'm not sure I've squeezed all the fat out,'' Hunter adds.